WHAT YOU NEED TO KNOW ABOUT SHARE BUY-BACK

A buyback, also known as a share repurchase, occurs when a company buys its own outstanding shares to reduce the number of shares available on the open market. Companies buy back shares for a number of reasons, such as to increase the value of remaining shares available by reducing the supply or to prevent other shareholders from taking a controlling stake. A buyback allows companies to invest in themselves, reducing the number of shares outstanding in the market. A company may feel its shares are undervalued and do a buyback to provide investors with a return.

The share repurchase reduces the number of existing shares, making each worth a greater percentage of the corporation. The stock’s earnings per share (EPS) increases while the price-to-earnings ratio (P/E) decreases if the stock price reverts to the pre-equity adjustment - a rare occurrence.

. A higher EPS elevates the market value of the remaining shares.After repurchase, the shares are canceled or held as treasury shares, so they are no longer held publicly and are not outstanding. A share repurchase demonstrates to investors that the business has sufficient cash set aside for emergencies and a low probability of economic troubles. Shareholders are usually offered prices at a premium to the current market price during buybacks.

Buybacks reduce the assets on the balance sheet, I.e CASH. As a result, return on assets (ROA) increases because assets are reduced; return on equity (ROE) increases because there is less outstanding equity. In general, the market views higher ROA and ROE as positives.

A share repurchase impacts a company's financial statements in various ways. A share repurchase reduces a company's available cash, which is then reflected on the balance sheet as a reduction by the amount the company spent in the buyback.

At the same time, the share repurchase reduces shareholders' equity by the same amount on the liabilities side of the balance sheet. Investors interested in finding out how much a company has spent on share repurchases can find the information in their quarterly earnings reports.

TWO WAYS A COMPANY OFFERS BUYBACK.

1. TENDER OFFER

The company shareholders receive a tender offer that requests them to submit, or tender, a portion or all of their shares within a certain time frame. The offer will state the number of shares the company wants to repurchase and a price range for the shares. Investors who accept the offer will state how many shares they want to tender along with the price they are willing to accept. Once the company has received all of the offers, it will find the right mix to buy the shares at the lowest cost.

2. OPEN MARKET

A company can also buy its shares on the open market at the market price. It is often the case, however, that the announcement of a buyback causes the share price to shoot up because the market perceives it as a positive signal.

ADVANTAGE OF A SHARE REPURCHASE

A share repurchase shows the corporation believes its shares are undervalued and is an efficient method of putting money back in shareholders’ pockets. The share repurchase reduces the number of existing shares, making each worth a greater percentage of the corporation. The stock’s EPS increases while the price-to-earnings ratio (P/E) decreases or the stock price increases

DISADVANTAGE OF A SHARE REPURCHASE.

Share repurchase can give investors the impression that the company does not have other profitable opportunities for growth, which is not a good sign for growth investors looking for revenue and profit. A company isnot obligated to repurchase shares due to changes in the marketplace or economy. Repurchasing shares puts a business in a unstable situation if the economy is volatile.

4 REASONS BEHIND SHARES BUYBACK.

(1.) IMPROVING FINANCIAL RATIOS.

A company can pursue a buyback  to improve its financial ratios—the metrics used by investors to analyze a company's value.  If reducing the number of shares is a strategy to make the financial ratios look better and not to create more value for shareholders, there could be a problem with management. If the reason  behind a company's buyback is good, better financial ratios as a result could  be a byproduct of a good corporate decision.

(2.) TAX BENEFIT

A  share buyback is similar to a dividend because the company is distributing money to shareholders. A major advantage that buybacks had over dividends was that they were taxed at the lower capital-gains tax rate while dividends are taxed at ordinary income tax rates when received. Tax rates and their effects typically change annually; thus, investors consider the annual tax rate on capital gains versus dividends as ordinary income when looking at the benefits

FOR EXAMPLE, Dangote Cement Plc (DCP), Nigeria’s most capitalized stock, announced it will buy back up to 10% of her issued 10.04billion ordinary shares on December 30, 2020. Dangote says these shares bought back will be held as Treasury Shares and subsequently canceled  in order to scale up the long term shareholder value. It will serve also as “a valuable tool for managing capital structure and balance sheet efficiency” and a “window to return cash to shareholders,” according to theprogramme explanatory statement.

The first tranche saw the acquisition of 0.24 per cent of its issued and fully paid common stock even though management had purposed to buy back 0.5 per cent for a start.That transaction cost the cement-maker more than N9.769 billion to consummate at a unit price of N243.02. As of the end of third quarter 2020, Dangote Cement held cash and cash equivalent of N176.653 billion ($449.9 million) on its books, providing the money it needed to splurge on buyback deals. It is the first share repurchase to be launched in Nigeria as investors and regulators alike have long harboured fears that the process could be abused.“It is a form of financial risk-taking that can considerably weaken a corporation’s credit quality. Also, it can bring about an unduly leveraged balance sheet, leaving the company exposed to economic shocks.” More companies listed on the Nigerian Stock Exchange are not likely to go the way of share repurchase, considering that there are only a handful of firms in the country with the level of retained cash to do buybacks like Dangote Cement.

                   CONCLUSION 

You now know that in share repurchase, the valuation of the company becomes cheaper, has the capacity to attract potential investors. You also know the reasons company do buy back and its impact on the company and shareholders too.